On 5 January 2026, the OECD published the Side-by-Side (SbS) Package. This package complements the OECD Inclusive Framework's model rules aimed at securing global 15% minimum taxation for large multinationals (referred to as "Pillar 2"). These minimum taxation rules have been implemented within the EU with effect from 1 January 2024.

The SBS Package implements the G7 political agreement with the United States of June 2025. This agreement followed proposed retaliatory taxes on US-sourced income earned by foreign residents of listed countries being removed from the "One Big Beautiful Bill Act". The retaliatory taxes responded to perceived extraterritorial taxation of US profits by Pillar 2 countries.

SBS Package and EU competitiveness

Under the SBS Package, US-headquartered multinationals can elect to disable top-up taxes otherwise payable to Pillar 2 countries on "undertaxed" profits of US group companies and, depending on the elected SbS Safe Harbour, of their foreign (non-Pillar 2) subsidiaries.

The SbS Package reinforces concerns about EU competitiveness. The US federal income tax system has grown significantly more competitive since US tax reforms were introduced in 2017, with a reduction of the headline rate to 21% (from 35%!); a lower effective tax rate for "foreign-derived deduction eligible income" or "FDDEI" (formerly FDII); and the availability of R&D and other tax credits. A distinguishing feature of the US worldwide system compared to Pillar 2 is that the US system allows "global blending" while the Pillar 2 system adopts a jurisdictional (country-by-country) approach. This could mean that under US standards, foreign profits may be treated as sufficiently taxed by blending "undertaxed" profits – for example, in foreign non-Pillar 2 jurisdictions – with "overtaxed" profits, while the undertaxed profits would be subject to a Pillar 2 top-up tax.

This raises some pressing questions. For example, could US-headquartered groups arrive at lower effective taxation of US profits – due to a combination of FDDEI and credits without a top-up tax, for instance – and/or of non-U.S. profits – by cross-jurisdictional blending – compared to taxation of similar US or foreign profits of EU-headquartered peers that are subject to Pillar 2 top-up taxes on those profits?

If so, could that have an impact on location-related decisions about (potentially highly profitable) existing or new innovative activities and related intangibles, or even on corporate transactions like HQ-location decisions in business combinations or spin-offs? For example, could it result in the HQ of the next major business combination being located in the US? When considering if these are valid questions, remember the time when US multinationals contemplated or implemented inversion transactions moving them out of the then existing high-rate US tax net.

Will the EU enhance tax-related competitiveness?

An important question is whether the EU and/or member states will take action to shore up their competitiveness in terms of corporate taxation, especially in innovative sectors considered strategically important. And, equally important, in what form and when they will do so.

Competitiveness is clearly high on the agenda of EU institutions and member states. We refer to yesterday's informal "Work on competitiveness in the European Council" retreat; the Draghi Report; the Commission's Competitiveness Compass; the 2026 Work Programme (including the 28^th legal regime); and EU simplification and de-cluttering efforts. Relevant developments in the Netherlands include the Wennink report (the "Dutch version of the Draghi report") and the coalition agreement recently published by the new Dutch government, which endorses many elements of the Wennink report.

Even if there was political will to actually take action, there would still be significant legal hurdles that could block or delay progress. EU law efforts are challenging and time-consuming because direct taxation is not harmonised within the EU, and legislative action in this respect requires unanimity and will be highly complicated to achieve in the near future. While corporate taxes are not harmonised, EU member states are restricted by EU state aid rules when it comes to domestic tax incentives. For example, reduced tax rates for foreign derived income only – like the US FDDEI regime – are generally not permissible (leaving aside WTO restrictions). Furthermore, the effectiveness of tax incentives must not be neutralised by Pillar 2 top-up taxes.

It will be interesting to see if the European Commission will consider further "model rules" for tax incentives that member states may choose to implement. This could facilitate efficient and effective implementation because no unanimity is needed, while addressing state aid risks because the Commission has the authority to approve these incentives. This would also allow the Commission control over tax competition between member states and secure "Pillar 2 compliance". In addition, the Commission may want to consider blessing the Pillar 2 qualification of US tax credits. This could address concerns that taxation of US profits benefitting from FDDEI and tax credits may be dependent on the HQ of the group being in the US or in the EU.

A subsequent question is if such model rules will provide for income-based incentives (like the US FDDEI regime) in addition to "Pillar 2 compliant" expense-based incentives. Ireland has shown that a reduction of corporate tax rates could increase corporate tax revenues; "less can be more".

A low headline tax rate will not be realistic for many EU countries for political or budgetary reasons. But a lower tax rate on innovative profits – through innovation or patent box regimes that many states have already implemented – may be feasible and effective. As long as they comply with the OECD's modified nexus approach, these regimes should be state aid compliant. However, the exact scope of the nexus approach is uncertain, and the Commission could be instrumental in facilitating a broader application of these regimes.

In lieu or in anticipation of EU action, member states could consider unilateral action. For instance, in the case of the Netherlands, considerable expansion of the innovation box regime, within the EU and OECD boundaries, seems technically possible even without legislative changes, and expanding specific R&D expense related tax credits could be considered.

Unless the EU effectively moved to a US-style global blending approach, which seems technically possible under the SbS Package but will likely be a political no go, US-headquartered groups may retain an advantage in that respect. Whether this difference will have a meaningful impact – given the complexities and uncertainties regarding the many other relevant tax and non-tax considerations – remains to be seen.